16 pv sum pv 1 pv 2 fv 1 1 r 1 fv 2 1 r 2 1000 1 01 1

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16 PV ( Sum ) = PV 1 + PV 2 = FV 1 (1 + r ) 1 + FV 2 (1 + r ) 2 = 1000 (1 + 0.1) 1 + 1000 (1 + 0.1) 2 = $1,735.54
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iClicker Example: Multiple Cash Flows H Your aunt and uncle give you $500 for your birthday each year (they are very predictable). It s your 19 th birthday and you badly want to buy a new car. A good used car, in your opinion, costs about $1500, but all you have are the $500 you just got. H In comes your older brother, who generously offers to lend you money in exchange for the next three birthday gifts from your aunt and uncle. The interest he is willing to lend you the money at is 20% per year. Will you be able to buy a used car now if you accept his offer? Timeline! a) No, even with his money you would only have $1,053.24 today. b) No, even with his money you would only have $1,294.37 today. c) Yes, with his money you would have $1,941.90 today. d) Yes, with his money you would have $1553.24 today. e) 20%? Isn t that usury? 17
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iClicker Example: Multiple Cash Flows (cont’d) H Your aunt and uncle give you $500 for your birthday each year (they are very predictable). It s your 19 th birthday and you badly want to buy a new car. A good used car, in your opinion, costs about $1500, but all you have are the $500 you just got. H In comes your older brother, who generously offers to lend you money in exchange for the next three birthday gifts from your aunt and uncle. The interest he is willing to lend you the money at is 20% per year. Will you be able to buy a used car now if you accept his offer? The correct answer is d). Together with the $500 you got today, you have $1,553.24. 24 . 053 , 1 2 . 1 500 2 . 1 500 2 . 1 500 ) ( 3 2 = + + = payments future PV 18
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